CBO on the Stimulus Package, and Still No Expansionary Fiscal Contraction in UK

The 2nd release for US GDP revealed a downward revision BEA; CR reports the breakdown. What is interesting is that the downward revision is due in part to a greater than previously estimated decline in the state and local government spending contribution. Something useful to keep in mind as state and local governments move to rely solely upon spending cuts instead of revenue increases as means to reduce budget deficits (e.g., as in Wisconsin).

Even with conservative values for the multipliers, the estimates imply that in the absence of the stimulus package, output would still be about $145 billion Ch.2005$ lower than the 2008 peak; under the high range values, approximately $450 billion.

Going forward, lots of discussion in the blogosphere about oil, ouptput and inflation. For a nuanced view of what the impact of higher oil prices will be, see Jim Hamilton and Macro Advisers. Also Leblanc and Chinn.

Update on Expansionary Fiscal Contraction

Crossing the Atlantic, one finds that the (short term) evidence in favor of an incipient expansionary fiscal contraction (see here for previous post) is getting weaker and weaker, even for an open economy like the UK. The 2010Q4 estimate for UK GDP was revised down from -0.5% (q/q) to -0.6% (essentially -2.6% on an annualized basis). Hence, the possibility that the negative reading was due to mis-estimation of the impact of bad weather has been largely ruled out, since the estimated impact has been held at negative 0.5 ppts.

If one is hoping that at least firms are anticipating positive effects from the coming spending cuts, the behavior of gross fixed capital formation (investment) is not promising. In 2010Q4, this series was declining 2.5% q/q (-9.7% on an annualized basis), contributing -0.4 ppts of the overall 0.6 ppts q/q decline in GDP.

“[e]conomist James Knightley at ING said the declining GDP was “fairly worrying given we know about the wave of fiscal austerity that is now starting to hit the U.K. economy. We will soon be starting to see negative figures for this component.”

Originally published at Econbrowser and reproduced here with permission.

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